The term loan servicing refers to the procedure of either a mortgage bank or servicing firm gathering up the regular principal and interest payments from the mortgage and loan borrowers. The amount of such service depends on the kind of loan in question and the particular terms that have been arranged between investors looking for such services and the servicing firm.
In the roaring days of the housing expansion, mortgage servicing got to be substantially more profitable than it had been in the past. Loan servicers sought out borrowers who were likely to have trouble making their payments on time. They did this with the hope of bringing in a greater number of lucrative late fees. After the financial collapse and in the Great Recession, this strategy came back to haunt them, as greater and greater numbers of homeowners defaulted on their mortgages and other types of loans.
Loan servicing outfits commonly make their money in the form of a percentage of the remaining balance on any loans that they are servicing. While the actual fees vary, they typically range from twenty five basis points down to a single basis point. This has much to do with the loan’s size, amount of service necessary, and whether the loan is backed up by residential properties or commercial properties.
Loan servicers carry a certain value on their balance sheets from these loans. The current net value of the payment flow obtained in servicing the loans minus the anticipated costs for servicing them generates the asset that goes on the balance sheet. Such asset values commonly prove to be highly volatile when refinancing becomes more common. This is because the loans are commonly paid off in advance, leading to an end to the servicing fees that are collected.
A number of companies have traditionally been major players in the loan servicing field. These include Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup as the biggest participants. GMAC is another major servicer. Between them they handle in excess of sixty percent of all American residential mortgage debt.
For special borrower cases that are near default or already behind, another industry of loan servicing has grown up. This is dominated by two companies. Ocwen Financial and Litton Loan Servicing, which Goldman Sachs owns, overshadow the industry. While it is the case that the big servicing companies are capable of handling borrowers who are unable or unwilling to pay, they do it inefficiently. As many as twenty-four different employees of the major loan servicing companies become involved from the first call of a collection agent down to the final foreclosure.